# What Value Should You Place On The Hartford Financial Services Group Inc (NYSE:HIG)?

HIG operates in the insurance industry, which has characteristics that make it unique compared to other sectors. Understanding these differences is crucial when it comes to putting a value on the insurance stock. For example, insurance companies are required to hold more capital to reduce the risk to shareholders. Focusing on data points like book values, on top of the return and cost of equity, can be suitable for computing HIG’s true value. Today I’ll take you through how to value HIG in a fairly useful and easy approach.

### Why Excess Return Model?

There are two facets to consider: regulation and type of assets. United States’s financial regulatory environment is relatively strict. Furthermore, insurance companies tend to not hold significant portions of tangible assets on their books. As traditional valuation models put weight on inputs such as capex and depreciation, which is less meaningful for finacial firms, the Excess Return model places importance on forecasting stable earnings and book values.

### Deriving HIG’s True Value

The main assumption for this model is, the value of the company is how much money it can generate from its current level of equity capital, in excess of the cost of that capital. The returns in excess of cost of equity is called excess returns:

Excess Return Per Share = (Stable Return On Equity – Cost Of Equity) (Book Value Of Equity Per Share)

= (0.13% – 9.8%) x \$38.89 = \$1.19

We use this value to calculate the terminal value of the company, which is how much we expect the company to continue to earn every year, forever. This is a common component of discounted cash flow models:

Terminal Value Per Share = Excess Return Per Share / (Cost of Equity – Expected Growth Rate)

= \$1.19 / (9.8% – 2.9%) = \$17.24

Combining these components gives us HIG’s intrinsic value per share:

Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share

= \$38.89 + \$17.24 = \$56.13

This results in an intrinsic value of \$56.13. Relative to the present share price of US\$45.80, HIG is , at this time, trading in-line with its true value. Therefore, there’s a bit of a downside if you were to buy HIG today. Pricing is one part of the analysis of your potential investment in HIG. There are other important factors to keep in mind when assessing whether HIG is the right investment in your portfolio.

### Next Steps:

For insurance companies, there are three key aspects you should look at:

1. Financial health: Does it have a healthy balance sheet? Take a look at our free bank analysis with six simple checks on things like leverage and risk.
2. Future earnings: What does the market think of HIG going forward? Our analyst growth expectation chart helps visualize HIG’s growth potential over the upcoming years.
3. Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether HIG is a dividend Rockstar with our historical and future dividend analysis.

For more details and sources, take a look at our full calculation on HIG here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.